UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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UNISOURCE ENERGY CORPORATION
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(Name of the Registrant as Specified In Its Charter)
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UNISOURCE ENERGY CORPORATION
One South Church Avenue
Tucson, Arizona 85701
April 6, 2005
James S. Pignatelli (520) 571-4000
Chairman of the Board
Dear Shareholders:
You are cordially invited to attend the UniSource Energy Corporation
2005 Annual Shareholders' Meeting to be held on Friday, May 6, 2005, at the
Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona. The
meeting will begin promptly at 10:00 a.m., Mountain Standard Time, so please
plan to arrive earlier. No admission tickets will be required for attendance at
the meeting.
Directors and officers will be available before and after the meeting
to speak with you. During the meeting, we will answer your questions regarding
our business affairs and we will consider the matters explained in the enclosed
Proxy Statement.
We have enclosed a proxy card that lists all matters that require your
vote. Please complete, sign, date and mail the proxy card as soon as possible,
whether or not you plan to attend the meeting. You may also vote by telephone or
the Internet, as explained on the enclosed proxy card. If you attend the meeting
and wish to vote your shares personally, you may revoke your proxy at that time.
Your interest in and continued support of UniSource Energy Corporation
are much appreciated.
Sincerely,
UNISOURCE ENERGY CORPORATION
/s/ James S. Pignatelli
-----------------------
James S. Pignatelli
Chairman of the Board, President and
Chief Executive Officer
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
To the Holders of Common Stock of
UniSource Energy Corporation
We will hold the 2005 Annual Shareholders' Meeting ("Meeting") of
UniSource Energy Corporation at the Marriott University Park Hotel, 880 East
Second Street, Tucson, Arizona, on May 6, 2005, at 10:00 a.m., Mountain Standard
Time ("MST"). The purpose of the Meeting is to:
1. elect nine directors to our Board of Directors for the ensuing year; and
2. consider any other matters which properly come before the Meeting.
Only shareholders of record at the close of business on March 28, 2005,
are entitled to vote at the Meeting.
We have enclosed our 2004 Annual Report, including audited financial
statements, and the Proxy Statement with this notice. Proxy soliciting material
is first being sent or given to shareholders on or about April 6, 2005. Your
proxy is being solicited by our Board of Directors.
Please complete, sign, date and mail the enclosed proxy card as soon as
possible, or vote by telephone or the Internet, as explained on the enclosed
proxy card.
/s/ Catherine A. Nichols
------------------------
Catherine A. Nichols
Corporate Secretary
Dated: April 6, 2005
YOUR VOTE IS IMPORTANT
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD BY zMAIL, OR TO VOTE BY TELEPHONE OR THE INTERNET, AS
EXPLAINED ON THE ENCLOSED PROXY CARD. IF THE MAIL OPTION IS SELECTED, USE THE
ENCLOSED ENVELOPE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED
STATES. RETURNING A SIGNED PROXY WILL NOT PROHIBIT YOU FROM ATTENDING THE
MEETING AND VOTING IN PERSON IF YOU SO DESIRE.
UNISOURCE ENERGY CORPORATION
One South Church Avenue
Tucson, Arizona 85701
ANNUAL SHAREHOLDERS' MEETING
PROXY STATEMENT
Annual Meeting May 6, 2005 Marriott University Park Hotel
10:00 a.m., MST 880 East Second Street
Tucson, Arizona 85719
Record Date The record date is March 28, 2005 ("Record Date"). If you
were a shareholder of record at the close of business on
the Record Date, you may vote at the 2005 Annual
Shareholders' Meeting ("Meeting") of UniSource Energy
Corporation ("UniSource Energy" as well as references to
"we," "our" and "us"). At the close of business on the
Record Date, we had 34,547,161 shares of common stock
outstanding.
Agenda 1. Proposal One: Elect nine directors to our Board
of Directors ("Board") for the ensuing year.
2. Consider any other matters which properly come
before the Meeting and any adjournments.
Independent Representatives of PricewaterhouseCoopers, LLP are expected
Auditors to be present at the Meeting with the opportunity to make a
statement and respond to appropriate questions from our
shareholders.
Proxies A form of proxy for execution by shareholders is enclosed.
Unless you tell us on the proxy card to vote differently, we
We will we will vote signed returned proxies "for" differently,
follow your the Board's nominees. The Board or proxy holders will use
voting their discretion on other matters that properly come before
instructions. the Meeting. If a nominee cannot or will not serve as a
If none, we director, the Board or the persons designated as proxies
will vote will vote for a person who they believe will carry on our
signed our present policies.
proxies
"for" the
nominees.
Proxies
Solicited by The Board.
First Mailing We anticipate first mailing this Proxy Statement along with
Date the proxy card on or about April 6, 2005.
Revoking Your You may revoke your proxy before it is voted at the Meeting.
Proxy To revoke, follow the procedures listed on page 3 under
"Voting Procedures/Revoking Your Proxy."
Comments Your comments about any aspects of our business are
welcome. You may use the space provided on the proxy card
We welcome your for this urpose, if desired. Although we may not respond
comments. The on an individual basis, your comments help us to measure
proxy card has your satisfaction, and we may benefit from your suggestions.
room for them.
PLEASE VOTE - YOUR VOTE IS IMPORTANT
Prompt return of your proxy will help reduce the costs of re-solicitation.
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CONTENTS
Voting Procedures/Revoking Your Proxy........................................ 2
UniSource Energy Share Ownership............................................. 3
Proposal One: Election of Directors*......................................... 6
Board Information............................................................ 8
Board Compensation........................................................... 11
Executive Compensation and Other Information**............................... 13
Equity Compensation Plan Information......................................... 15
Officer Change in Control Agreements......................................... 18
Director Independence Criteria............................................... 19
Transactions with Management and Others...................................... 20
Compensation Committee Report on Executive Compensation...................... 21
Audit Committee Report....................................................... 24
Performance Graph**.......................................................... 27
Submission of Shareholder Proposals.......................................... 28
Other Business............................................................... 28
Appendix A.................................................................. A-1
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* We expect to vote on this item at the Meeting.
** The Compensation Committee Report and the Performance Graph will not be
incorporated by reference into any present or future filings we make with
the Securities and Exchange Commission ("SEC"), even if those reports
incorporate all or any part of this Proxy Statement.
VOTING PROCEDURES/REVOKING YOUR PROXY
You can vote by You can vote your shares by telephone, the Internet, mail
telephone, the or in person at the Meeting. Your proxy card contains
Internet, mail or instructions for voting by telephone or the Internet,
in person. We which are the least expensive and fastest methods of
encourage you to voting. To vote by mail, complete, sign and date your
vote by telephone proxy card, or your broker's voting instruction card if
or the Internet to your shares are held by your broker, and return it in the
help us save money. enclosed return envelope.
Under Arizona law, a majority of the shares entitled to
vote on any single matter which may be brought before the
Meeting will constitute a quorum. Business may be
conducted once a quorum is represented at the Meeting.
Except as otherwise specified by law or in our Articles of
Incorporation or Bylaws, if a quorum exists, action on a
matter other than the election of directors will be deemed
approved if the votes cast in favor of the matter exceed
votes cast against it.
Directors are elected by a plurality of the votes cast by
the shares entitled to vote if a quorum is present. A
plurality means receiving the largest number of votes,
regardless of whether that is a majority. Withheld votes
will be counted as being represented at the Meeting for
quorum purposes but will not have an effect on the vote.
2
You may cumulate In the election of directors, each shareholder has the
your votes for right to cumulate his votes by casting a total number of
directors. votes equal to the number of his shares of common stock
multiplied by the number of directors to be elected. He
may cast all of such votes for one nominee or distribute
such votes among two or more nominees. For any other
matter that may properly come before the Meeting, each
share of common stock will be entitled to one vote.
You can revoke your Any shareholder giving a proxy has a right to revoke that
proxy after sending proxy by giving notice to UniSource Energy in writing
it in by following directed to the Corporate Secretary, UniSource Energy
these procedures. Corporation, One South Church Avenue, Suite 200, Tucson,
Arizona 85701, or in person at the Meeting at any time
before the proxy is exercised. Those who fail to return a
proxy or fail to attend the Meeting will not count
towards determining any required plurality, majority or
quorum.
The shares represented by an executed proxy will be voted
for the election of directors or withheld in accordance
with the specifications in the proxy. If no specification
is made in an executed proxy, the proxy will be voted in
favor of the nominees as set forth herein.
Proxy Solicitation We will bear the entire cost of the solicitation of
proxies. Solicitations will be made primarily by mail.
Additional solicitation of brokers, banks, nominees and
institutional investors may be made pursuant to a special
engagement of DF King & Co., Inc., at a cost of
approximately $7,500 plus reasonable out-of-pocket
expenses. Solicitations may also be made by telephone,
facsimile or personal interview, if necessary, to obtain
reasonable representation of shareholders at the Meeting.
Our employees may solicit proxies for no additional
compensation. We will request brokers or other persons
holding stock in their names, or in the names of their
nominees, to forward proxy materials to the beneficial
owners of such stock or request authority for the
execution of the proxies. We will reimburse brokers and
other persons for reasonable expenses they incur in
sending these proxy materials to you if you are a
beneficial holder of our shares.
UNISOURCE ENERGY SHARE OWNERSHIP
Security Ownership The following table sets forth the number and percentage
of Management of shares beneficially owned as of the Record Date and
the nature of such ownership by each of our directors
(all of which are nominees), our Chief Executive Officer
and our five other most highly compensated executive
officers at January 5, 2005 (the "Named Executives") and
all directors and officers as a group. Ownership includes
direct and indirect (beneficial) ownership, as defined by
the SEC rules.
Name and Amount and
Title Title of Nature of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
-------- ---------------- -------------------- --------
Common James S. Pignatelli 737,547 (2) 2.2%
Chairman, President and
Chief Executive Officer
Common Lawrence J. Aldrich 11,484 (3) *
Director
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Name and Amount and
Title Title of Nature of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
-------- ---------------- -------------------- --------
Common Larry W. Bickle 17,424 (4) *
Director
Common Elizabeth T. Bilby 15,077 (5) *
Director
Common Harold W. Burlingame 13,677 (4) *
Director
Common John L. Carter 24,231 (6) *
Director
Common Robert A. Elliott 1,610 (7)
Director
Common Kenneth Handy 8,477 (8) *
Director
Common Warren Y. Jobe 6,885 (8) *
Director
Common Steven J. Glaser 211,371 (9) *
Senior Vice President and
Chief Operating Officer, Transmission
& Distribution - Tucson Electric
Power Company ("TEP")
Common Dennis R. Nelson 195,490 (10) *
Senior Vice President and Chief Operating
Officer - UniSource Energy Services, Inc.
("UES")
Common Michael J. DeConcini 144,888 (11) *
Senior Vice President, Investments
and Planning / Senior Vice President
and Chief Operating Officer,
Energy Resources - TEP
Common Kevin P. Larson 126,255 (12) *
Vice President, Chief Financial Officer and
Treasurer
Common Vincent Nitido, Jr. 159,565 (13) *
Vice President, General Counsel and Chief
Administrative Officer
Common All directors and executive officers as a 2,016,052 (14) 5.8%
group
-------------------
* Represents less than 1% of the outstanding common stock of UniSource Energy.
(1) Amounts include the following:
o Any shares held in the name of the spouse, minor children or other
relatives sharing the home of the director or officer. Except as
otherwise indicated below, the directors and officers have sole voting
and investment power over the shares shown. Voting power includes the
power to direct the voting of the shares held, and investment power
includes the power to direct the disposition of the shares held.
o Shares subject to options exercisable within 60 days, based on
information from E*Trade, UniSource Energy's stock option plan
administrator.
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o Equivalent share amounts allocated to the individuals' 401(k) Plan
which, since June 1, 1998, has included a UniSource Energy Stock Fund
investment option.
(2) Includes 707,764 shares subject to options exercisable within 60 days, and
15,708 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(3) Includes 7,572 shares subject to options exercisable within 60 days.
(4) Includes 10,772 shares subject to options exercisable within 60 days.
(5) Includes 14,372 shares subject to options exercisable within 60 days.
(6) Includes 13,172 shares subject to options exercisable within 60 days.
(7) Includes 797 shares subject to options exercisable within 60 days.
(8) Includes 5,572 shares subject to options exercisable within 60 days.
(9) Includes 186,201 shares subject to options exercisable within 60 days,and
2,693 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(10) Includes 178,988 shares subject to options exercisable within 60 days, and
8,420 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(11) Includes 135,008 shares subject to options exercisable within 60 days, and
4,910 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(12) Includes 105,154 shares subject to options exercisable within 60 days, and
2,337 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(13) Includes 139,654 shares subject to options exercisable within 60 days, and
4,017 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of December 31, 2004.
(14) Includes 1,818,311 shares subject to options exercisable within 60 days,
and 39,386 shares purchased under the 401(k) Plan UniSource Energy Stock
Fund as of December 31, 2004.
Security As of March 28, 2005, based on information reported in
Ownership of filings made by the following persons with the SEC or
Certain information otherwise known to us, the following
Beneficial Owners persons were known or reasonably believed to be, as
more fully described below, the beneficial owners of
more than 5% of our common stock:
Amount and
Name and Address Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
-------------- ------------------- -------------------- --------
Common Third Point Management Co., LLC 2,900,000 (1) 8.5%
360 Madison Ave., 24th Floor
New York, NY 10017
Common Zimmer Lucas Capital, LLC 2,429,000 (2) 7.1%
45 Broadway, 28th Floor
New York, NY 10006
Common White Mountains Insurance Group 2,293,100 (3) 6.7%
80 South Main Street
Hanover, NH 03755
Common Shumway Capital Partners, LLC 2,205,600 (4) 6.4%
600 Steamboat Road
Greenwich, CT 06830
-------------------
(1) In a statement (Schedule 13D) filed with the SEC on February 7, 2005, Third
Point Management Co., LLC ("Third Point") indicated it has shared voting
and shared dispositive power over 2,900,000 shares of our common stock.
Third Point indicated that 1,714,700 shares are beneficially owned by the
Third Point Offshore Fund, Ltd.
(2) In a statement (Schedule 13G) filed with the SEC on January 3, 2005, Zimmer
Lucas Capital, LLC indicated that it has shared voting and shared
dispositive power over 2,429,000 shares of our common stock.
(3) In a statement (Schedule 13G) filed with the SEC on February 11, 2005,
White Mountains Insurance Group ("WMIG") indicated that it has shared
voting and shared dispositive power over 2,293,100 shares of our common
stock. WMIG indicated that it indirectly controls, through various
wholly-owned subsidiaries and certain of its employee benefit plans,
2,293,100 shares. WMIG stated that the shares are beneficially owned by (i)
wholly-owned subsidiaries of WMIG which are controlled by either White
Mountains Advisors LLC (1,215,000 shares) or a third party pursuant to an
investment
5
advisory agreement (28,100 shares), (ii) employee benefit plans of
WMIG which are controlled by White Mountains Advisors LLC (830,000
shares) and (iii) third parties which are controlled by White Mountains
Advisors LLC pursuant to an investment advisory agreement (220,000 shares).
(4) In a statement (Schedule 13G) filed with the SEC on February 4, 2005,
Shumway Capital Partners, LLC indicated that it has shared voting and
shared dispositive power over 2,205,600 shares of our common stock.
Section 16(a) Section 16(a) of the Securities Exchange Act of 1934,
Beneficial as amended, and regulations of the SEC require our
Ownership executive officers, directors and persons who
Reporting beneficially own more than 10% of our common stock,
Compliance as well as certain affiliates of those persons, to
file initial reports of ownership and monthly
transaction reports covering any changes in ownership
with the SEC and the New York Stock Exchange
("NYSE"). SEC regulations require these persons to
furnish us with copies of all reports they file
pursuant to Section 16(a).
Based solely upon a review of the copies of the
reports received by us and on written representations
of our directors and officers, we believe that,
during fiscal year 2004, except as described below,
all filing requirements applicable to executive
officers and directors were complied with in a timely
manner. Forms 4 reporting our January 2, 2004
restricted stock grants and restricted stock unit
grants to our non-employee directors (Mr. Aldrich,
Mr. Bickle, Ms. Bilby, Mr. Burlingame, Mr. Carter,
Mr. Elliott, Mr. Handy, and Mr. Jobe) were filed
late. Forms 4 reporting stock option exercises by Mr.
Delawder on February 12, 2004, Ms. Nichols on March
24, 2004, Ms. Kissinger on May 28, 2004, Mr. Hansen
on June 4, 2004, and Mr. DeConcini on June 7, 2004
and, in the case of Mr. Delawder, Ms. Nichols, and
Mr. DeConcini, related sales of stock on the option
exercise dates, were filed late. Forms 4 reporting
dividend equivalent stock units credited under our
Omnibus Stock and Incentive Plan, our Outside
Director Stock Optio n Plan, and our Management and
Director Deferred Compensation Plan, as applicable,
on June 10, 2004 and again on October 4, 2004 for
each of our non-employee directors identified above
and for each of Mr. DeConcini, Mr. Delawder, Mr.
Glaser, Mr. Hansen, Ms. Kissinger, Mr. Larson, Mr.
Nelson, Mr. Nitido and Mr. Pignatelli were filed
late.
PROPOSAL ONE: ELECTION OF DIRECTORS
General At the Meeting, our shareholders of record will
elect nine directors to serve on our Board for the
We will elect ensuing year and until their successors are elected
nine directors and qualified. The shares represented by executed
this year. proxies in the form enclosed, unless withheld, will
be voted for the nine nominees listed below, or, in
the discretion of the persons acting as proxies,
will be voted cumulatively for one or more of such
nominees. All of the current nominees are present
members of the Board. All of the nominees have
consented to serve if elected. If any nominee
becomes unavailable for any reason, or a vacancy
should occur before the election, it is the
intention of the persons designated as proxies to
vote, in their discretion, for other nominees.
6
BOARD NOMINEES
James S. Chairman of the Board, President and Chief
Pignatelli Executive Officer of UniSource Energy since July
1998; Senior Vice President and Chief Operating
Officer of UniSource Energy from December 1997 to
July 1998; Chairman of the Board of Directors,
President and Chief Executive Officer of TEP, the
principal subsidiary of UniSource Energy, since
July 1998; Executive Vice President and Chief
Operating Officer of TEP from March 1998 to July
1998; Senior Vice President and Chief Operating
Officer of TEP from 1996 to 1998; Chairman of the
Board of Directors, President and Chief Executive
Officer of Millennium Energy Holdings, Inc.
("Millennium"), a wholly owned subsidiary of
UniSource Energy, since 1997; Director of UES, a
wholly-owned subsidiary of UniSource Energy, since
2003. Board member since 1998. Age 61.
Lawrence J. General Partner, Valley Ventures, LP, since
Aldrich September 2002; Managing Director and Founder,
(4) Tucson Ventures, LLC, from February 2000 to
September 2002; President and Chief Executive
Officer of Tucson Newspapers from January 1992 to
February 2000; Director of TEP and Millennium since
2000; Director of UES since 2004. Board member
since 2000. Age 52.
Larry W. Bickle Managing Director of Haddington Ventures, LLC, an
(4) investment company, since 1997; Director of St.
Mary Land and Exploration since 1995; Director of
Millennium since 1998; Director of UES since 2004;
Responsible Director of Infinite Power Solutions,
Inc. ("IPS") since 2004. Board member since 1998.
Age 59.
Elizabeth T. Retired President of Gourmet Products, Inc., an
Bilby agricultural product marketing company; Retired
(4) Director of Marketing of Green Valley Pecans.
Director of TEP since 1995; Director of Millennium
from 1998-2003; Director of UES since 2004. Board
member since 1995. Age 65.
Harold W. Senior Executive Advisor for Cingular Wireless
Burlingame Services (formerly AT&T Wireless) since July 2001;
(1)(2)(3) Executive Vice President, Communications and Human
Resources of AT&T Wireless Services from April 2000
to June 2001; Executive Vice President, Merger and
Joint Venture Integration of AT&T from March 1999
to March 2000; Executive Vice President of Human
Resources of AT&T from 1987 to March 1999; Member
of the AT&T Foundation from November 1986 to
December 2002; Chair, Executive Committee,
Organization Resources Counselors since June 1999;
Director of TEP since 1998. Board member since
1998. Age 64.
John L. Carter Retired from IBM in 1987; held executive positions
(1)(2)(3)(4) at various locations in IBM, including General
Manager of IBM, Tucson, Arizona. President and
Chief Executive Officer of Qualtronics
Manufacturing, Inc. from 1987 to 1993. Retired as
Executive Vice President and Chief Financial
Officer of Burr-Brown Corporation in 1996. Director
of TEP since 1996; Director of Millennium since
1998; Director of UES since 2004; Responsible
Director of Global Solar Energy, Inc. ("GSE") since
2004. Board member since 1996. Age 70.
7
Robert A. Elliott President and owner of The Elliott Accounting Group
(1)(2)(3) since 1983; Director and Minority Shareholder of
Southern Arizona Community Bank since 1998;
Director of Tucson Urban League from 1998 to 2004;
Television Analyst/Pre-game Show Co-host for Fox
Sports Arizona since 1999; Corporate Secretary of
Southern Arizona Community Bank since 1999; Radio
Host of "In the Paint" Sports Talk Show from 2000
to 2004; Chairman of the Board of Tucson
Metropolitan Chamber of Commerce since 2002;
Treasurer of Tucson Urban League from 2002 to 2003;
Chairman of the Board of Tucson Urban League from
2003 to 2004; Director of TEP since May 2003. Board
member since 2003. Age 49.
Kenneth Handy Retired CPA; Vice President and Chief Financial
(1)(2)(3) Officer of The Permanente Medical Group, Inc. (the
physician services component of the Kaiser
Permanente Medical Care Program in Northern
California) from 1978 to 1998; Partner at Ernst &
Ernst (now Ernst & Young) from 1972 to 1978;
Director of TEP since 2001; Director of Millennium
from 2001 to 2003; Lead Director of UES since 2004.
Board member since 2001. Age 66.
Warren Y. Jobe Retired CPA; Senior Vice President of Southern
(2)(3)(4) Company from 1998 to 2001; Executive Vice President
and Chief Financial Officer and member of the Board
of Directors of Georgia Power Company from 1982 to
1998; former President of the Georgia Power
Foundation Inc. from 1986 to 2001; Director of
Wellpoint, Inc. since 2001; Director of TEP since
2001; Director of Millennium from 2001 to 2003;
Director of HomeBanc Corporation since 2004;
Director of STI Classic Funds since 2004. Board
member since 2001. Age 64.
(1) Member of the Corporate Governance and Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Finance Committee.
The Board recommends that you vote "FOR" these nominees.
BOARD INFORMATION
Board Meetings In 2004, the Board held a total of 13 regular and
special meetings. Each director attended at least 75% of
his or her Board and committee meetings. Additionally,
the non-management directors met at regularly scheduled
executive sessions without management present. Mr.
Carter was the Lead Director at these executive sessions.
Board Shareholders or other interested parties wishing to
Communication communicate with the Board, the non-management directors
or any individual director may contact the Lead Director
by mail, addressed to UniSource Energy Lead Director,
c/o Corporate Secretary, UniSource Energy Corporation,
One South Church Avenue, Suite 200, Tucson, Arizona
85701. The communications will be kept confidential and
forwarded to the Lead Director. Communications received
by the Lead Director will be forwarded to the
appropriate director(s) or to an individual
non-management director.
Shareholders or other interested parties wishing to
communicate with the Board regarding non-financial
matters may contact the Chairperson of the Corporate
Governance and Nominating Committee either by mail,
addressed to
8
Chairperson, Corporate Governance and Nominating
Committee, UniSource Energy Corporation, P. O. Box
30430, Tucson, Arizona 85751-0430, or by e-mail at
unscorpgov@earthlink.net. Shareholders or other
interested parties wishing to communicate with the
Board regarding financial matters may contact the
Chairperson of the Audit Committee either by mail,
addressed to Chairperson, Audit Committee, UniSource
Energy Corporation, P.O. Box 191191, Atlanta,Georgia
31119, or by e-mail at unscorpaudit@earthlink.net.
Items that are unrelated to a director's duties and
responsibilities as a Board member may be excluded from
consideration, including, without limitation,
solicitations and advertisements, junk mail,
product-related communications, job referral materials
such as resumes, surveys and material that is determined
to be illegal or otherwise inappropriate.
Board Committees THE AUDIT COMMITTEE reviews current and projected
financial results of operations, selects a firm of
independent registered public accountants to audit our
financial statements annually, reviews and discusses the
scope of such audit, receives and reviews the audit
reports and recommendations, transmits its
recommendations to the Board, reviews our accounting and
internal control procedures with our internal audit
department from time to time, makes recommendations to
the Board for any changes deemed necessary in such
procedures and performs such other functions as
delegated by the Board. Our Audit Committee held 11
meetings in 2004 and was in full compliance with its
written charter, as amended on October 5, 2004 and
attached to this Proxy Statement as Appendix A.
Upon the recommendation of the Audit Committee, our
Board adopted a code of ethics for our directors,
officers and employees.
THE COMPENSATION COMMITTEE reviews the performance of
our directors and officers and reviews and approves
directors' and officers' compensation. Our Compensation
Committee held three meetings in 2004 and was in full
compliance with its written charter.
THE FINANCE COMMITTEE reviews and recommends to the
Board long-range financial policies, objectives and
actions required to achieve those objectives.
Specifically, the Finance Committee reviews capital and
operating budgets, current and projected financial
results of operations, short-term and long-range
financing plans, dividend policy, risk management
activities and major commercial banking, investment
banking, financial consulting and other financial
relations of UniSource Energy. Our Finance Committee
held three meetings in 2004 and was in full compliance
with its written charter.
THE CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
reviews and recommends corporate governance principles,
interviews potential directors and nominates and
recommends to the shareholders and directors, as the
case may be, qualified persons to serve as directors.
The Corporate Governance and Nominating Committee also
reviews and recommends membership for all the committees
to the Board and reviews applicable rules and
regulations relating to
9
the duties and responsibilities of the Board. The
Corporate Governance and Nominating Committee held two
meetings in 2004 and was in full compliance with its
written charter.
The Corporate Governance and Nominating Committee
identifies and considers nominee candidates supplied by
shareholders and Board members. The Corporate Secretary,
as directed by the Corporate Governance and Nominating
Committee, prepares portfolios for nominee candidates
that include confirmation of the candidate's interest,
independence, biographical information, review of
business background and experience and reference checks.
The Corporate Governance and Nominating Committee then
evaluates candidates using, in large part, the criteria
set forth in the next paragraph and any other criteria
the Committee deems appropriate, and conducts a personal
interview with each candidate. Upon completion of this
process, formal invitations are extended to accept
election to the Board.
The Corporate Governance and Nominating Committee has
not adopted specific minimum qualifications with respect
to a Committee-recommended Board nominee, but desirable
qualifications are set forth in the Board manual and
include prior community, professional or business
experience that demonstrates leadership capabilities,
the ability to review and analyze complex business
issues, the ability to effectively represent the
interests of our shareholders while keeping in
perspective the interests of our customers, the ability
to devote the time and interest required to attend and
fully prepare for all regular and special Board
meetings, the ability to communicate and work
effectively with the other Board members and personnel
and the ability to fully adhere to any applicable laws,
rules or regulations relating to the performance of a
director's duties and responsibilities.
While no formal policy exists, the Corporate Governance
and Nominating Committee does consider recommendations
for Board nominees received from our shareholders. The
deadline for consideration of recommendations for next
year's annual meeting of the shareholders is December 7,
2005. Recommendations must be in writing and include
detailed biographical material indicating the
candidate's qualifications and a written statement from
the candidate of willingness and availability to serve.
Recommendations should be directed to the Corporate
Secretary, UniSource Energy Corporation, One South
Church Avenue, Suite 200, Tucson, Arizona 85701. The
Board will consider nominees on a case-by-case basis and
does not believe a formal policy is warranted at this
time due to a manageable volume of nominations.
Each member of our Audit Committee, Compensation
Committee and Corporate Governance and Nominating
Committee is independent based upon independence
criteria established by our Board, which criteria are in
compliance with applicable NYSE listing standards.
10
Copies of A copy of the Audit, Compensation and Corporate
Charters, Governance and Nominating Committee Charters, as well as
Guidelines and our Corporate Governance Guidelines and code of ethics,
Code of Ethics are available on our Web site at www.unisourceenergy.com
or may be obtained by shareholders, without charge, upon
written request to Library and Resource Center,
UniSource Energy Corporation, 3950 East Irvington Road,
Mail Stop RC114, Tucson, Arizona 85714.
BOARD COMPENSATION
Retainer and Fees In 2004, each non-employee director received a $20,000
annual cash retainer, $1,000 for each Board meeting
attended, $1,000 for each committee meeting attended
and an additional $1,000 per committee meeting if
acting as a committee chairperson. We reimburse
directors for any expenses related to their Board and
committee service.
Effective for 2005, a Chairmanship retainer replaces
the additional $1,000 per committee meeting previously
paid to the committee chairman. The annual Chairmanship
retainer for the Audit Chairman is $20,000. The annual
Chairmanship retainer for all other Chairmanships,
including special committee chairmanships, is $15,000.
Chairmanship retainers will be credited to individual
Director accounts in the form of stock units and will
accrue dividend equivalent stock units. The stock units
will be distributed in cash in the year following
termination of Board service unless UniSource Energy
solicits and receives shareholder approval for a new
stock incentive plan, in which case the stock units may
be distributed in shares at the Board's or Compensation
Committee's discretion.
Option and Under the terms of the 1994 Outside Director Stock
Restricted Share Option Plan, each non-employee director in office on
Grants the first business day of each year, and who has been
a director for at least three months, is granted a
stock option covering a number of shares of our common
stock equal to $10,000 divided by the value of an
option as of the date of grant. In 2004, non-employee
directors received an award of restricted stock units
in lieu of stock options due to the impact of the
proposed merger on the market value of our common
stock. Restricted stock units vest in one-third
increments over three years.
Each non-employee director in office on the first
business day of each year is also granted a number of
restricted shares of our common stock equal to $10,000
divided by the then fair market value of a share of
our common stock. Restricted shares vest on the third
anniversary of the grant date.
On January 2, 2004, each of the non-employee directors
received 405 restricted stock units and 405 restricted
shares of our common stock.
Effective for 2005, the value of the equity
compensation component of non-employee director
compensation is increased from $20,000 to $40,000.
Because awards valued at $20,000 were made under the
1994 Outside Director Stock Option Plan in January
2005, a one-time award of restricted stock units equal
to $20,000 divided by the then fair market value of a
share of our common stock, will be made to each
non-employee director in office on May 6, 2005, the
date of the annual Shareholder Meeting. The awards will
vest over a one-year period and,
11
once vested, will accrue dividend equivalent stock
units. The stock units will be distributed in cash
in the year following termination of Board service
unless UniSource Energy solicits and receives
shareholder approval for a new stock incentive plan, in
which case the stock units may be distributed in shares
at the Board's or Compensation Committee's discretion.
Unvested awards are forfeited at termination other than
for disability or retirement.
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
Cash Compensation Security Grants
-------------------------------------- ---------------------------------------
Number of Shares Number of
Annual Subject to Securities
Retainer Meeting Restricted Stock Underlying Options
Name (1) Fee ($) (2) Fees ($) (2) Award
------------------- ----------- ---------------- ---------------- -----------------
Lawrence J. Aldrich 20,000 22,000 (3)(5) 810 0
Larry W. Bickle 20,000 20,000 (4)(5) 810 0
Elizabeth T. Bilby 20,000 27,000 (5) 810 0
Harold W. Burlingame 20,000 31,000 810 0
John L. Carter 20,000 48,000 (3)(4)(5) 810 0
Robert A. Elliott 20,000 30,000 810 0
Kenneth Handy 20,000 35,000 (3)(5) 810 0
Warren Y. Jobe 20,000 44,000 810 0
-------------------
(1) Mr. Pignatelli is not listed in this table because directors who are
officers of UniSource Energy or salaried employees of its subsidiaries do
not receive compensation in their capacity as members of the Board. Refer
to the Summary Compensation Table for information concerning his
compensation.
(2) Cash compensation includes amounts earned but deferred at the election of
directors.
(3) As members of the GSE board, Mr. Aldrich and Mr. Carter each received an
additional $2,000 and Mr. Handy received an additional $1,000 for attending
GSE board meetings during 2004. UniSource Energy owns 99% of GSE.
(4) As members of the IPS board, Mr. Bickle and Mr. Carter received an
additional $3,000 for attending IPS board meetings during 2004. UniSource
Energy owns 72% of IPS.
(5) As members of the UES board, Mr. Aldrich, Ms. Bilby, Mr. Carter and Mr.
Handy each received an additional $3,000 and Mr. Bickle received an
additional $2,000 for attending UES board meetings during 2004. UniSource
Energy owns 100% of UES.
12
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of The following table summarizes the compensation and
Compensation stock option grants to, and stock options/stock
appreciation rights ("SARs") held by, the Named
Executives.
SUMMARY COMPENSATION TABLE
Annual Compensation Compensation Awards
----------------------- ---------------------------------
Restricted Securities All Other
Name and Stock Awards Underlying Compensation
Principal Position Year Salary ($) Bonus ($) ($) (1) Options/SARs (#) ($) (2)
------------------ ---- ---------- --------- ----------- ---------------- ------------
James S. Pignatelli 2004 624,231 525,000 -- 0 13,000
Chairman, President and 2003 599,327 550,000 -- 21,226 12,000
Chief Executive Officer 2002 574,654 320,000 -- 150,000 11,000
Steven J. Glaser 2004 284,692 178,000 -- 0 9,225
Senior Vice President and Chief 2003 274,596 166,000 -- 9,729 11,232
Operating Officer, Transmission 2002 259,654 110,000 -- 45,000 11,000
& Distribution - TEP
Dennis R. Nelson 2004 274,846 137,000 -- 0 12,368
Senior Vice President and Chief 2003 269,732 150,000 -- 9,552 12,000
Operating Officer - UES 2002 260,000 90,000 -- 45,000 11,000
Michael J. DeConcini 2004 244,537 138,000 -- 0 11,004
Senior Vice President, 2003 229,192 145,000 -- 8,137 10,314
Investments and Planning / 2002 199,654 72,000 -- 40,000 11,000
Senior Vice President and Chief
Operating Officer, Energy
Resources - TEP
Kevin P. Larson 2004 229,692 130,000 -- 0 10,336
Vice President, Chief Financial 2003 219,462 145,000 -- 7,783 9,876
Officer and Treasurer 2002 199,656 76,000 -- 35,000 11,000
Vincent Nitido, Jr. 2004 229,692 130,000 -- 0 9,225
Vice President, General Counsel 2003 219,462 145,000 -- 7,783 9,876
and Chief Administrative Officer 2002 199,654 68,000 -- 40,000 11,000
-------------------
(1) As of December 31, 2004, based on the closing market price of UniSource
Energy's stock on that date of $24.11, Mr. Pignatelli held 110,915 stock
units (including dividend equivalent stock units) valued at $2,674,162; Mr.
Glaser held 28,003 stock units (including dividend equivalent stock units)
valued at $675,149; Mr. Nelson held 24,653 stock units (including dividend
equivalent stock units) valued at $594,372; Mr. DeConcini held 24,356 stock
units (including dividend equivalent stock units) valued at $587,232; and
Mr. Nitido held 16,374 stock units valued at $394,777.
(2) All Other Compensation is comprised of UniSource Energy's contributions to
the 401(k) Plan and Excess 401(k) contributions to the UniSource Energy
Corporation Management and Directors Deferred Compensation Plan.
13
Stock Option During 2004, the Compensation Committee of our Board
Grants in 2004 granted no stock options to officers.
Option and SAR The following table includes the number and value of
Holdings as of exercisable and non-exercisable options and SARs held
December 31, by the Named Executives as of December 31, 2004.
2004
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs at Fiscal In-the-Money Options/SARs at
Acquired Year-End (#) Fiscal Year End ($)
on Exercise Value Exercisable/ Exercisable/
Name (#) Realized($) Unexercisable Unexercisable(1)
--------------------- ----------- ----------- ---------------------- -----------------------------
James S. Pignatelli 7,424 $53,022 707,764 / 0 5,997,824 / 0
Steven J. Glaser 3,671 $28,256 186,201 / 0 1,476,105 / 0
Dennis R. Nelson 4,543 $37,380 178,988 / 0 1,492,992 / 0
Michael J. DeConcini 342 $2,849 135,008 / 0 1,082,951 / 0
Kevin P. Larson 2,014 $16,716 105,154 / 0 858,056 / 0
Vincent Nitido, Jr. 1,939 $15,882 139,654 / 0 1,111,732 / 0
-------------------
(1) Includes cash dividend equivalents on stock options awarded in 2002
under the 1994 UniSource Energy Corporation Omnibus Stock and Incentive
Plan.
2004 Long-Term The following table includes the number of shares,
Incentive Plan units or other rights awarded to the Named
Awards Executives in the last fiscal year under any
long-term incentive plan.
Payout of the 2004 long-term incentive plan awards
was based on the achievement, during the 2004
performance period, of three financial goals. The
three equally-weighted financial goals were UNS
earnings per share, TEP operating cash flow and UNS
consolidated operating cash flow. Threshold
performance is achieved at 80% of target, and
exceptional performance is achieved at 120% of
target.
14
LONG-TERM INCENTIVE PLANS
AWARDS IN LAST FISCAL YEAR
Number of Shares, Performance or Other Period Future Payouts under
Name Units or Other Rights (#) Until Maturation or Payout Non-Stock Price-Based Plans
Payable
(# or $) (1)
----------- ------------------------- --------------------------- ----------------------------
James S. Pignatelli 625,000 (2) 1/1/04 - 12/31/04 $625,000
Steven J. Glaser 285,000 (2) 1/1/04 - 12/31/04 $285,000
Dennis R. Nelson 275,000 (2) 1/1/04 - 12/31/04 $275,000
Michael J. DeConcini 245,000 (2) 1/1/04 - 12/31/04 $245,000
Kevin P. Larson 230,000 (2) 1/1/04 - 12/31/04 $230,000
Vincent Nitido, Jr. 230,000 (2) 1/1/04 - 12/31/04 $230,000
-------------------
(1) Based on the achievement of the three financial goals in 2004,
awards were granted at 120% of target. Payouts vest and become
payable in one-third increments on March 18, 2005, January 2006 and
January 2007.
(2) Performance units are denominated in cash. One performance unit
equals $1.00.
EQUITY COMPENSATION PLAN INFORMATION
Equity Our only equity-based compensation plan that has not
Compensation Plans been approved by shareholders is the Management and
Directors Deferred Compensation Plan (the "DCP").
Shareholder approval of the DCP has not been
required. Under the DCP, certain eligible officers
and other employees selected for participation, and
non-employee members of the Board, may elect to
defer a percentage of the compensation or fees that
would otherwise become payable to the individual for
their services to us. We also credit DCP accounts of
employees participating in our 401(k) Plan with the
additional amount of UniSource Energy matching
contributions that the participant would have been
entitled to under the 401(k) Plan if certain Code
limits did not apply to limit the amount of
UniSource Energy matching contributions made under
the 401(k) Plan. Each participant in the DCP may
elect that his or her deferrals be credited in the
form of deferred shares. Deferred shares are
bookkeeping entries that, when payable, will be paid
in the form of an equivalent number of shares of
UniSource Energy common stock. Deferred shares
accrue dividend equivalents, credited in the form of
additional deferred shares, as dividends are paid by
UniSource Energy on its issued and outstanding
common stock. Each participant elects the time and
manner of payment (lump sum or installments) of his
or her deferred shares under the DCP. The shares
used to satisfy our stock obligations under the DCP
are shares that have been purchased on the open
market.
15
EQUITY COMPENSATION PLAN TABLE
Equity The following table sets forth information as of
Compensation December 31, 2004, with respect to UniSource
Energy's equity compensation plans.
Number of Shares of Number of Shares of UniSource Energy
UniSource Energy Common Common Stock Remaining Available for
Stock to Future Issuance Under Equity
be Issued Upon Exercise Weighted-Average Compensation Plans (Excluding
of Outstanding Exercise Price of Shares Reflected
Plan Category Options and Rights Outstanding Options in the First Column
------------------------ ------------------------ --------------------- ---------------------------------
Equity Compensation Plans 2,328,674 (2) $16.19 (3) 983,175 (4)
Approved by Shareholders (1)
--
Equity Compensation Plans 55,951 (5) -- (6)
Not Approved by Shareholders
-- --
Total 2,384,625
-------------------
(1) The equity compensation plans approved by shareholders are the
UniSource Energy Corporation 1994 Omnibus Stock and Incentive
Plan and the UniSource Energy Corporation 1994 Outside Director
Stock Option Plan. Under the terms of the UniSource Energy
Corporation 1994 Omnibus Stock and Incentive Plan, no award may
be granted after February 3, 2004. The plan remains in effect
until all awards have expired or terminated or shall have been
exercised or fully vested, and any stock thereto shall have been
purchased or acquired.
(2) Includes options outstanding as to 2,075,552 shares, and stock
units, dividend equivalent stock units and restricted stock units
(payable in an equivalent number of shares) outstanding as to
253,122 shares.
(3) Calculated based on the outstanding options and exclusive of
outstanding stock units.
(4) Of these shares, 813,557 were available for additional awards
under the 1994 Omnibus Stock and Incentive Plan and 169,618 were
available for additional awards under the 1994 Outside Director
Stock Option Plan. Although 813,557 shares remained available for
grant under the 1994 Omnibus Stock and Incentive Plan, pursuant
to the plan document, no award may be granted under the Plan
after February 3, 2004. Shares available under either of these
plans may be used for any type of award authorized under that
plan. Awards authorized under the 1994 Omnibus Stock and
Incentive Plan include options, stock appreciation rights,
restricted stock, performance shares and stock units. Awards
authorized under the 1994 Outside Director Stock Plan include
options, restricted stock and dividend equivalents.
(5) Deferred shares credited under the DCP.
(6) There is no explicit share limit under the DCP. The number of
shares to be delivered with respect to the DCP in the future
depends on the levels of fees and compensation that participants
elect to defer under the DCP. The UniSource Energy shares used to
satisfy our stock obligations under the DCP are shares that have
been purchased on the open market.
Pension Plans The following table shows the estimated annual
retirement benefit payable to participants,
including the Named Executives, for the average
annual compensation and years of service indicated.
Compensation is comprised of the officers' average
annual compensation during the five consecutive
years of employment with the highest compensation
within the last 15 years preceding retirement.
Compensation is comprised of salary and bonus, as
shown on the Summary Compensation Table.
16
PENSION PLAN TABLE
Years of Service
---------------------------------------------------------------------------------------------
Remuneration ($) 10 15 20 25 30 35
-- -- -- -- -- --
125,000 54,850 54,850 54,850 54,850 54,850 54,850
150,000 65,820 65,820 65,820 65,820 65,820 65,820
175,000 76,790 76,790 76,790 76,790 76,790 76,790
200,000 87,760 87,760 87,760 87,760 87,760 87,760
225,000 98,730 98,730 98,730 98,730 98,730 98,730
250,000 109,700 109,700 109,700 109,700 109,700 109,700
300,000 131,640 131,640 131,640 131,640 131,640 131,640
400,000 175,520 175,520 175,520 175,520 175,520 175,520
450,000 197,460 197,460 197,460 197,460 197,460 197,460
500,000 219,400 219,400 219,400 219,400 219,400 219,400
550,000 241,340 241,340 241,340 241,340 241,340 241,340
600,000 263,280 263,280 263,280 263,280 263,280 263,280
650,000 285,220 285,220 285,220 285,220 285,220 285,220
700,000 307,160 307,160 307,160 307,160 307,160 307,160
750,000 329,100 329,100 329,100 329,100 329,100 329,100
800,000 351,040 351,040 351,040 351,040 351,040 351,040
850,000 372,980 372,980 372,980 372,980 372,980 372,980
900,000 394,920 394,920 394,920 394,920 394,920 394,920
950,000 416,860 416,860 416,860 416,860 416,860 416,860
1,000,000 438,800 438,800 438,800 438,800 438,800 438,800
1,100,000 482,680 482,680 482,680 482,680 482,680 482,680
1,200,000 526,560 526,560 526,560 526,560 526,560 526,560
1,300,000 570,440 570,440 570,440 570,440 570,440 570,440
1,400,000 614,320 614,320 614,320 614,320 614,320 614,320
The amount of the pension benefit is equal to a base of
40% of the compensation for ten years of service, plus
9.7% (life annuity factor) of such calculated amount. The
estimated benefits shown in the Pension Plan Table are
straight life annuities not subject to a reduction for any
Social Security benefits. The table also reflects amounts
payable under the Excess Benefits Plan which will pay from
the general funds of UniSource Energy the difference, if
any, between the benefits under TEP's pension plan and any
benefit payments, which may be limited by federal
regulations.
17
The credited years of service for UniSource Energy's Named
Executives are as follows:
Credited
Name Years of Service
------------------- ----------------
James S. Pignatelli 10
Steven J. Glaser 15
Dennis R. Nelson 27
Michael J. DeConcini 16
Kevin P. Larson 19
Vincent Nitido, Jr. 14
OFFICER CHANGE IN CONTROL AGREEMENTS
Change in Control TEP has Change in Control Agreements ("Agreements")
Agreements were with all of its officers. The Agreements are in
adopted to effect until the later of: (i) five years after the
attract and date either TEP or the officer gives written notice
retain quality of termination of the Agreement, or (ii) if a change
management. in control occurs during the term of the Agreement,
five years after the change in control. On March 29,
2004, a change in control occurred for purposes of
the Agreements when our shareholders, at a special
meeting, approved the acquisition agreement that
provided for an affiliate of Saquaro Utility Group
L.P. to acquire all of our outstanding shares of
common stock. This was not affected by the fact that
the acquisition was ultimately not consummated.
For the purpose of the Agreements, a change in
control includes the acquisition of beneficial
ownership of 30% of the common stock of UniSource
Energy, certain changes in the UniSource Energy
Board of Directors, approval by the shareholders of
certain mergers or consolidations or certain
transfers of the assets of UniSource Energy. The
Agreements provide that each officer shall be
employed by TEP, or one of its subsidiaries or
affiliates, in a position comparable to his or her
current position, with compensation and benefits,
which are at least equal to their then current
compensation and benefits, for an employment period
of five years after a change in control (subject to
earlier termination due to the officer's acceptance
of a position with another company or termination
for cause).
In the event that the officer's employment is
terminated by TEP (with the exception of
termination due to the officer's acceptance of
another position or for cause), or if the officer
terminates employment because of a reduction in
position, responsibility, compensation or for
certain other stated reasons, the officer is
entitled to severance benefits in the form of: (i)
a lump sum payment equal to the present value of
three times annual salary and bonus compensation,
(ii) the present value of the additional amount the
officer would have received under the TEP
Retirement Plan if the officer had continued to be
employed for the five-year period after a change in
control occurs, plus (iii) the present value of any
employee awards under the 1994 Omnibus Stock and
Incentive Plan or any successor plan, which are
outstanding at the time of the officer's
termination (whether vested or not), prorated based
on length of service. Such officer is also entitled
to continue to participate in TEP's health, death
and disability benefit plans for five years after
the termination. The Agreements further provide
that TEP will make a payment to the officer to
offset any excise taxes that may become payable
under certain conditions. Any payments made in
respect of such excise taxes are not deductible by
us. Assuming Mr. Pignatelli's and the other Named
18
Executives' employment was terminated, the total
payments made by UniSource Energy pursuant to the
Agreements would not be expected to exceed $20
million.
On March 3, 2005, TEP provided the officers with
respect to which the Agreements were in effect at
that time, written notice of termination of the
Agreements. Pursuant to the terms of the
Agreements, the termination will become effective
on March 3, 2010, the fifth anniversary of the date
of the written notice of termination.
DIRECTOR INDEPENDENCE CRITERIA
Board independence The Board has established the following criteria for
is determined by determining independence, among other things, in
consideration of order to determine eligibility to serve on the Audit
established Committee, the Compensation Committee and the
criteria. Corporate Governance and Nominating Committee.
Directors that meet each of the following criteria
are deemed independent:
1. A director who is an employee of the Company
or whose immediate family member is an
executive officer of the Company cannot be
"independent" until three years after the
employment has ended. Employment as an interim
Chairman or CEO shall not disqualify a director
from being considered independent following
that employment.
2. A director who is, or in the past three years
has been, affiliated with or employed in a
professional capacity by a present or former
internal or external auditor of the Company or
whose immediate family member is, or in the
past three years has been, affiliated with or
employed in a professional capacity by a
present or former internal or external auditor
of the Company cannot be "independent" until
three years after the end of the affiliation,
employment or auditing relationship.
3. A director who is employed, or whose
immediate family member is employed, as an
executive officer of another company where any
of the Company's present executives serve on
that company's compensation committee is not
"independent" until three years after the end
of such service or the employment relationship.
4. A director who receives, or whose immediate
family member receives, more than $100,000 per
year in direct compensation from the Company,
other than director and committee fees and
pension or other forms of deferred compensation
for prior service (provided such compensation
is not contingent in any way on continued
service), is not independent until three years
after he or she ceases to receive more than
$100,000 per year in such compensation.
19
Compensation received by a director for former
service as an interim Chairman or CEO need not
be considered in determining independence.
Compensation received by an immediate family
member for service as a non-executive employee
of the Company need not be considered in
determining independence under this test.
5. A director who is an executive officer or an
employee, or whose immediate family member is
an executive officer, of a company that makes
payments to, or receives payments from, the
Company for property or services in an amount
which, in any single fiscal year, exceeds the
greater of $1 million or 2% of such other
company's consolidated gross revenue, is not
"independent" until three years after falling
below such threshold.
6. Directors who possess an interest in any
transaction for which disclosure would be
required pursuant to Item 404(a) of SEC
Regulation S-K (generally, this item requires
proxy statement disclosure of transactions
exceeding $60,000 between a director and the
Company or any of our subsidiaries) are not
independent.
7. Directors that do not meet item 6 of the
aforementioned criteria may nonetheless be
deemed independent by a majority of independent
directors, provided the basis for such
determination shall be disclosed in the
Company's Proxy Statement.
Based upon the foregoing criteria, the Board has
deemed each director to be independent, with the
exceptions of Mr. Aldrich, Mr. Bickle, Ms. Bilby and
Mr. Pignatelli. See "Transactions with Management and
Others" below.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Haddington Millennium was authorized by its Board of Directors in
Energy 2000 to invest $15 million, in aggregate, over a three-
Partners II LP to five-year period in Haddington Energy Partners II
LP. Mr. Bickle, a member of our Board, is the managing
director of Haddington Ventures LLC, the general
partner of Haddington Energy Partners II LP. As of
December 31, 2004, Millennium had funded approximately
$10.9 million under this commitment, $2.4 million of
which was funded in 2004.
Valley Ventures III, In 2000, Millennium made a commitment of $5 million in
LP capital plus a share of expenses to Tucson Ventures,
LLC, a venture capital fund. In 2002, Tucson Ventures,
LLC merged with Valley Ventures III, LP, also a venture
capital fund. In connection with the merger of the
funds, Millennium's commitment was revised to a total
of $6 million, including expenses. Mr. Aldrich, a
member of our Board, is a general partner of the
company that manages Valley Ventures III, LP. As of
December 31, 2004, Millennium had funded approximately
$3.3 million under this commitment.
Millennium Energy Mr. Stephen Alexander, an immediate family member of
Investments Ms. Bilby, a member of our Board, is employed by
Millennium. As Director of Energy Investments, Mr.
Alexander assists in overseeing Millennium's investment
portfolio. For his services in 2004, Mr. Alexander
received compensation of approximately $150,000 from
Millennium.
20
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee The Compensation Committee is responsible for
developing and administering executive compensation
policies and programs for UniSource Energy and TEP
and making recommendations to the Board with respect
thereto. The Compensation Committee makes
recommendations to the Board with respect to the
compensation of UniSource Energy's executive
officers, including Mr. Pignatelli and the other
Named Executives, and sets policies for and reviews
the compensation awarded to other key members of
management. UniSource Energy applies a consistent
philosophy to compensation for all executive
employees, including the Named Executives.
Overall Objectives UniSource Energy's executive compensation policies
and programs generally are intended to (i) relate the
compensation of employees to the success of UniSource
Energy and the corresponding creation of shareholder
value and deliver rewards for superior performance
and consequences for underperformance and (ii)
attract, retain and motivate executives and key
employees with competitive compensation opportunities.
Executive The Compensation Committee reviews our executives'
Compensation compensation each year. Compensation depends on many
Generally factors, including individual performance,
responsibilities, future challenges and objectives
and the executive's potential contribution to our
future success. The Compensation Committee also looks
at our financial performance and the compensation
levels at comparable companies.
UniSource Energy's 2004 compensation program
consisted of three components:
o base salary;
o short-term incentive compensation; and
o long-term incentive compensation.
Base Salary The base salary component of compensation is intended
to be competitive with that paid by comparable
companies in the energy industry. In developing the
compensation program, the Compensation Committee
retained an external consultant to conduct a
competitive analysis of pay for UniSource Energy's
officer group. In conducting its analysis for 2004,
the consultant selected a peer group of energy
companies with a revenue range of $585 million to
$1.6 billion. UniSource Energy ranks at the 33rd
percentile of the peer group. The peer group
companies were selected based on (i) similarity to
UniSource Energy in terms of business sector (i.e.,
electric services and natural gas distribution
companies) and (ii) comparable size to UniSource
Energy in terms of sales and market capitalization.
The Compensation Committee believes that the
companies in the peer group are a more appropriate
comparison for UniSource Energy than the Edison
Electric 100 companies used in the Performance Graph
on page 27 of this Proxy Statement because the
type of business, annual revenues and market
capitalization of the companies included in the
survey are more closely related to those of
UniSource Energy and the companies in the peer
group are primary competitors of UniSource Energy
for top-level management personnel. The
external data from companies in the peer group was
used to develop market compensation for each
executive position. "Market compensation" refers to
the median salary for executives in the peer group.
Base salaries for UniSource Energy's executive
officers, including Mr. Pignatelli and the other
21
Named Executives, were set at market compensation
levels in January 2004, in recognition of the
increasingly competitive environment in the electric
industry, the need to continue to attract and retain
highly qualified executives and the fact that a
substantial portion of each executive's total
compensation package is "at-risk," based on the
achievement of certain corporate goals. See
"Short-Term Incentive Compensation and Long-Term
Incentive Compensation" below.
Short-Term The Board adopted a Short-Term Incentive Plan to
Incentive provide compensation for meeting or exceeding
Compensation specified objectives, designed to contribute to the
attainment of UniSource Energy's performance targets
and long-term strategic plan. Under the Short-Term
Incentive Plan, target award levels are set as a
percentage of each participant's base salary. In
2004, the target award levels for our executive
officers ranged from 30% to 70% of base salary.
Awards for Mr. Pignatelli and the remaining executive
officers are determined by the Board based on the
achievement of corporate financial goals, including
earnings per share and consolidated cash flow, and
the accomplishment of previously established
individual goals and contribution to business
results. Based on the foregoing factors, the
Compensation Committee made awards to the Named
Executives ranging from 56% to 84% of base salary. In
determining Mr. Pignatelli's award, the Compensation
Committee focused on the achievement of previously
established strategic, financial, operating and
community goals. Incentive compensation awarded to
Mr. Pignatelli and the other Named Executives is set
forth in the preceding Summary Compensation Table.
Long-Term UniSource Energy's long-term incentive compensation
Incentive is intended to attract and retain quality employees
Compensation over the long-term in a manner that directly aligns
their interests with those of UniSource Energy's
shareholders and promote UniSource Energy's long-term
performance goals.
On February 5, 2004, the Compensation Committee
awarded performance units (denominated in cash) to
all executive officers of UniSource Energy, including
Mr. Pignatelli and the other Named Executives. In
calculating the level of awards to the executive
officers, the Compensation Committee considered the
above analysis of executive compensation at
comparative companies. Based on such analysis, the
Compensation Committee awarded Mr. Pignatelli and the
other Named Executives performance units with a total
value equal to 100% of base salary for target
performance. The number of performance units awarded
to Mr. Pignatelli was 625,000. See "2004 Long-Term
Incentives Plan Awards" on page 14 of this Proxy
Statement for a discussion of the performance
criteria upon which the payout of performance units
is dependent. In determining the 2004 long-term
incentive awards, the Compensation Committee did not
consider awards, including stock options, previously
granted or outstanding.
22
The Compensation Committee believes that senior
management should have a significant equity interest
in UniSource Energy. In order to promote equity
ownership and further align the interests of
management with those of UniSource Energy's
shareholders, the Compensation Committee adopted
share retention and ownership guidelines for senior
management at its February 3, 2005 meeting. Under
these guidelines certain executives are expected to
maintain a significant ownership position in
UniSource Energy common stock, expressed as a
multiple of their salary as follows:
o Chairman, President and
Chief Executive Officer 5 times salary
o Senior Vice President 3 times salary
o Other Vice President 1 times salary
The Compensation Committee periodically reviews share
ownership levels of the persons subject to these
guidelines. The following types of shares count
towards meeting the specified ownership levels: (i)
shares owned outright, jointly with spouse, or in trust
for the executive's benefit, (ii) shares held in
qualified retirement and savings plans and (iii) stock
units payable in shares held in nonqualified deferred
compensation accounts. Nine of the ten executives
subject to these guidelines have achieved shareholdings
in excess of the applicable multiple set forth
above.
Tax Code Concerns The Compensation Committee does not presently have a
policy regarding qualifying compensation paid to
executive officers for deductibility under Section
162(m) of the Code.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Harold W. Burlingame, Chair
John L. Carter
Robert A. Elliott
Kenneth Handy
Warren Y. Jobe
23
AUDIT COMMITTEE REPORT
The Committee The Audit Committee is made up of five financially
literate directors who are independent based upon
independence criteria established by our Board, which
criteria are in compliance with applicable NYSE listing
standards. Our Board has determined that while each
member of the Audit Committee has accounting and/or
related financial management expertise, Mr. Jobe is the
Audit Committee financial expert for the purposes of Item
401(h) of SEC Regulation S-K. In addition to Mr. Jobe,
there are two other financial experts on the Committee.
Each financial expert is independent as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Securities
and Exchange Act of 1934. The Board previously adopted a
written charter for the Audit Committee. On October 5,
2004, the Board approved amendments to the Charter. The
Audit Committee Charter is included as Appendix A to this
Proxy Statement. The Committee has complied with its
charter, including the requirement to meet periodically
with our independent auditors, internal audit department
and management to discuss the auditors' findings and
other financial and accounting matters.
In connection with our December 31, 2004 financial
statements, the Audit Committee has (i) reviewed and
discussed the audited financial statements with
management, (ii) discussed with PricewaterhouseCoopers,
LLP, our independent auditor, the matters required to be
discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU Sec. 380), (iii) received from
PricewaterhouseCoopers, LLP the written disclosures and
the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit
Committees) and (iv) discussed with
PricewaterhouseCoopers, LLP its independence.
Based on all of its activities during the year, the Audit
Committee recommended to the Board that the audited
financial statements for 2004 be included in the Annual
Report on Form 10-K for filing with the SEC.
Pre-Approved Rules adopted by the SEC in order to implement
Policies and requirements of the Sarbanes-Oxley Act of 2002 require
Procedures public company audit committees to pre-approve audit and
non-audit services. Our Audit Committee has adopted a
policy pursuant to which audit, audit-related, tax and
other services are pre-approved by category of service.
Recognizing that situations may arise where it is in our
best interest for the auditor to perform services in
addition to the annual audit of our financial statements,
the policy sets forth guidelines and procedures with
respect to approval of the four categories of service
designed to achieve the continued independence of the
auditor when it is retained to perform such services for
us. The policy requires the Audit Committee to be
informed of each service and does not include any
delegation of the Audit Committee's responsibilities to
management. The Audit Committee may delegate to the
Chairman of the Audit Committee the authority to grant
pre-approvals of audit and non-audit services requiring
Audit Committee
24
approval where the Audit Committee Chairman believes it
is desirable to pre-approve such services prior to the
next regularly scheduled Audit Committee meeting. The
decisions of the Audit Committee Chairman to pre-approve
any such services from one regularly scheduled Audit
Committee meeting to the next shall be reported to the
Audit Committee.
Fees The following table details fees paid to
PricewaterhouseCoopers, LLP for professional services
during 2003 and 2004. The Audit Committee has considered
whether the provision of services to us by
PricewaterhouseCoopers, LLP, beyond those rendered in
connection with their audit and review of our financial
statements, is compatible with maintaining their
independence as auditors.
2003 2004
-------- ----------
Audit Fees $903,566 $2,190,556
Audit-Related Fees $644,744 $76,583
Tax Fees $98,645 $2,002
All Other Fees $2,598 $3,228
Audit fees include fees for the audit of our consolidated
financial statements included in our Annual Report on
Form 10-K and review of financial statements included in
our Quarterly Reports on Form 10-Q. Audit fees also
include services provided by PricewaterhouseCoopers, LLP
in connection with the audit of the effectiveness of
internal control over financial reporting and on
management's assessment of the effectiveness of internal
control over financial reporting, comfort letters,
consents and other services related to SEC matters and
financing transactions, statutory and regulatory audits,
and accounting consultations to the extent necessary for
PricewaterhouseCoopers, LLP to fulfill their
responsibilities under generally accepted auditing
standards. Audit fees in connection with the audit of the
effectiveness of internal control over financial
reporting and on management's assessment of the
effectiveness of internal control over financial
reporting in compliance with Sarbanes-Oxley totaled
$1,395,841 (already included in Audit Fees in the table
above) in 2004.
Audit-related fees during 2004 principally include fees
for employee benefit plan audits and due diligence-type
services related to proposed acquisitions. During 2003,
audit-related fees related primarily to the audits of the
gas and electric system assets acquired from Citizens
Communications Company on August 11, 2003 (for periods
prior to the acquisition date) and audits of employee
benefit plans.
Tax fees include tax compliance, tax advice and tax
planning.
All other fees consist of fees for all other services
other than those reported above and, in 2003 and 2004,
principally include subscription fees for research tools.
25
All services performed by PricewaterhouseCoopers, LLP are
approved in advance by the Audit Committee in accordance
with the Audit Committee's pre-approval policy for
services provided by the independent auditor.
Respectfully submitted,
THE AUDIT COMMITTEE
Warren Y. Jobe, Chair
Harold W. Burlingame
John L. Carter
Robert A. Elliott
Kenneth Handy
26
PERFORMANCE GRAPH
Comparison of Cumulative Five-Year Total Return Among
UniSource Energy, Standard & Poor's 500 Index
and EEI Index of 64 Investor-Owned Utilities (1)
The graph showing on the hard copy represents the comparison of four year
cumulative total return between UniSource Energy Corporation, the S&P 500
Index, and EEI Index of 100 investor-owned utilities. The graph's X-axis
shows the years 1999 to 2004, and the Y-axis shows dollar values from zero
to 250. The data points are connected by lines with the following markers:
UniSource Energy Corporation - triangles; S&P 500 - diamonds; EEI Index -
100 Electrics - squares. The data points are as follows:
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
UniSource Energy
Corporation $100 $172 $170 $166 $243 $244
S&P 500 Index $100 $148 $135 $115 $142 $175
EEI Index - 100
Electrics $100 $91 $80 $62 $80 $88
(1) Assumes $100 invested on December 31, 1998 in UniSource Energy common
stock, S&P Index and EEI Index. It is assumed that all dividends are
reinvested in stock at the frequency paid and the returns of each
component peer group issuer are weighted according to the issuer's
stock market capitalization at the beginning of the period.
Data and Calculations 2000 2001 2002 2003 2004
-------------------------------- ----- ------ ------ ----- -----
S&P 500 Total Return Change -9.10% -11.89% -22.10% 28.69% 8.99%
EEI Index - 64 Electrics Change 47.97% -8.79% -14.73% 23.48% 22.84%
UniSource Energy Change 71.80% -1.30% -2.20% 46.72% 0.37%
27
SUBMISSION OF SHAREHOLDER PROPOSALS
General Rule 14a-4 of the SEC's proxy rules allows us to use
discretionary voting authority to vote on a matter coming
before an annual meeting of our shareholders, which was
not included in our Proxy Statement (if we do not have
notice of the matter at least 45 days before the date on
which we first mailed our proxy materials for the prior
year's annual meeting of the shareholders). In addition,
we may also use discretionary voting authority if we
receive timely notice of such matter (as described in the
preceding sentence) and if, in the Proxy Statement, we
describe the nature of such matter and how we intend to
exercise our discretion to vote on it. Accordingly, for
our 2006 annual meeting of shareholders, any such notice
must be submitted to the Corporate Secretary of UniSource
Energy on or before February 20, 2006.
We must receive This requirement is separate and apart from the SEC's
your shareholder requirements that a shareholder must meet in order to
proposals by have a shareholder proposal included in our Proxy
December 7, 2005. Statement. Shareholder proposals intended to be
presented at our 2006 annual meeting of the shareholders
must be received by us no later than December 7, 2005,
in order to be eligible for inclusion in our Proxy
Statement and the form of proxy relating to that meeting.
Direct any proposals, as well as related questions, to the
undersigned.
OTHER BUSINESS
The Board knows of no other matters for consideration at
the Meeting. If any other business should properly arise,
the persons appointed in the enclosed proxy have
discretionary authority to vote in accordance with their
best judgment.
Copies of our 2004 Annual Report on Form 10-K may be
obtained by shareholders, without charge, upon written
request to Library and Resource Center, UniSource Energy
Corporation, 3950 East Irvington Road, Mail Stop RC114,
Tucson, Arizona 85714. You may also obtain our SEC
filings through the Internet at www.sec.gov or
www.UniSourceEnergy.com.
By order of the Board of Directors,
/s/ Catherine A. Nichols
------------------------
Catherine A.Nichols
Corporate Secretary
PLEASE VOTE - YOUR VOTE IS IMPORTANT
28
APPENDIX A
Amended
October 5, 2004
UNISOURCE ENERGY CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
1. COMPOSITION
The Audit Committee of the Board of Directors (the "Committee") consists of
no fewer than three independent Directors appointed annually by the Board.
Directors eligible to serve on the Committee shall be determined in
accordance with the NYSE Listed Company Manual, Corporate Governance
Standards for Audit Committees and the Sarbanes-Oxley Act of 2002. The
Board shall designate one of the Committee members as Chairman of the
Committee. Each member of the Committee shall be financially literate, and
at least one member shall have accounting or financial management
expertise.
2. MEETINGS
The Committee will hold at least four regular meetings each year, and such
additional meetings as it may deem necessary. Additional meetings will be
called by the Chairman of the Committee. The agendas for the regular
meetings shall include all items necessary to complete the duties of the
Committee as set forth herein. In addition to the Committee members and the
Secretary, the Chairman of the Board, Chief Executive Officer and other
members of management, internal audit and representatives of the
independent auditors may attend as appropriate.
3. RULES OF PROCEDURE
The Committee will determine its own rules of procedure with respect to how
its meetings are to be called, as well as the place and time.
4. COMPENSATION
Each member will be paid such fees as may be established from time to time
by the Board for service on the Committee, and will be reimbursed for
travel expenses incurred by attendance at meetings. Directors' fees are the
only compensation an Audit Committee member may receive from the Company.
A-1
5. COMMITTEE SECRETARY
The Secretary of the Committee will be the Corporate Secretary of the
Company (or such other representative of management as the Committee may
designate) and not be a member of the Committee. The Secretary will attend
all meetings and maintain minutes, advise members of all meetings called,
arrange with the Chairman or other convening authority for preparation and
distribution of the agenda for each meeting, and carry out other functions
as may be assigned from time to time by the Committee. At such meetings
where attendance by a Company representative is not appropriate, the
Chairman shall act as secretary of the meeting or appoint another member of
the Committee to act as secretary of such meetings.
6. QUORUM
A majority of the total membership of the Committee will constitute a
quorum.
7. COMMITTEE PURPOSE
The Audit Committee is appointed by the Board to assist with Board
oversight of (1) the integrity of the Company's financial statements (2)
the Company's compliance with legal and regulatory requirements (3) the
independent auditor's qualifications and independence, and, (4) the
performance of the Company's internal audit function and independent
auditors.
The Audit Committee must also prepare the report that SEC rules require be
included in the Company's annual proxy statement.
8. SPECIFIC DUTIES OF THE COMMITTEE
Independent Audit:
------------------
(1) Sole authority to appoint, retain and terminate the Company's
independent auditor.
(2) Sole authority to approve all audit engagement fees and terms, as
well as all significant, non-audit engagements (in accordance with
SEC) with the independent auditors.
(3) Annually obtain and review a report from the independent auditors
delineating all relationships between the auditor and the Company
(to assess the auditors' independence).
(4) Review the experience and qualifications of the lead partner of
the independent auditor.
(5) Ensure the rotation of the audit partner(s) as required by law.
(6) At least annually, obtain and review a report from the independent
auditors describing the firm's internal quality control process,
including any material issues raised by the most recent internal
quality control review or peer review of the firm, or by any
inquiry or investigation by governmental, regulatory or
professional authorities within the past five years, respecting
one or more independent audits carried out by the firm, and any
steps taken to deal with any such issues.
A-2
(7) Review the results of each independent audit, including any
qualifications in the independent auditor's opinion, any related
management letter, and management's response to recommendations
made by the independent auditor in connection with the audit.
(8) Review the annual audited financial statements with management and
the independent auditor, including management's discussion and
analysis, major issues regarding accounting and auditing
principles and practices, as well as the adequacy of internal
controls. Recommend to the Board, based on such review and
discussion, whether the audited financial statements should be
included in the Company's annual report on Form 10-K.
(9) Annually review an analysis prepared by management and the
independent auditor of significant financial reporting issues,
quality of financial reporting, and judgments made in connection
with the preparation of the Company's financial statements,
including an analysis of the effect of alternative GAAP methods on
the Company's financial statements. Review the procedures employed
by the Company in preparing published financial statements and
related management commentaries.
(10) Review with management and the independent auditor the Company's
quarterly financial statements prior to the filing of its Form
10-Q, including management's discussion and analysis and the
results of the independent auditors' review of the quarterly
financial statements (SAS 90). Note: This can be performed by a
member of the Audit Committee.
(11) Discuss annually with the independent auditor the required
communications contained within Statement on Auditing Standards
No. 61 relating to the conduct of the audit.
(12) Discuss with the independent auditor material issues on which the
national office of the independent auditor was consulted by the
Company's audit team.
(13) Meet with the independent auditor prior to the audit to discuss
the planning and staffing of the audit.
Internal Audit:
---------------
(14) Review the appointment, replacement, reassignment or dismissal of
the Company's General Auditor.
(15) Review and approve the internal audit department charter, annual
audit plan and the audit methodology.
(16) Review management and General Auditor reports submitted to the
Committee that are material to the Company as a whole, and
management's response to those reports.
(17) Annually review the General Auditor's Summary of Officer's Annual
Travel and Entertainment expense schedule. Include in this review
a discussion of perquisites.
A-3
Miscellaneous:
--------------
(18) Review earnings press release as well as financial information and
earnings guidance provided to analysts and ratings agencies.
(19) Review quarterly updates from management on material litigation.
(20) Periodically review with management, the Company's policies on
major financial risk exposure, and the measures taken to reduce
such risk.
(21) Annually review the Company's Corporate Code of Conduct and
compliance therewith.
(22) Establish and maintain procedures for the confidential, anonymous
submission by employees of the Company of concerns regarding
accounting or auditing matters.
(23) Establish guidelines for the Company's hiring of employees or
former employees of the independent auditor.
(24) Annually review this Audit Committee Charter and make any
necessary changes.
(25) Annually perform an evaluation of the Committee, its members,
functions and performance.
(26) Review disclosures made by the Company's CEO and CFO during their
certification process for the Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving
management or other employees who have a significant role in the
Company's internal controls.
9. EXECUTIVE SESSION
Meet quarterly with management, the General Auditor and the independent
auditor in separate executive sessions.
10. RESPONSIBILITIES OF THE CHAIRMAN
The Chairman of the Committee will present the Committee's recommendations
to the Board for its approval and periodically provide the Board, for its
information, with a summary of the Committee's determinations and
approvals. Additionally, set the annual compensation for the General
Auditor in conjunction with the Company's Chief Executive Officer.
A-4
11. RESPONSIBILITIES OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the Company will advise and make
recommendations to the Committee and, in the normal course, attend all
meetings of the Committee.
12. OTHER AUTHORITY
The Audit Committee shall have the authority to retain special legal,
accounting or other consultants to advise the Committee. The Audit
Committee has full discretion to meet with individuals within or outside
the Company.
A-5
APPENDIX B
FORM OF PROXY CARD
UNISOURCE ENERGY
YOUR VOTE IS IMPORTANT
VOTE BY TELEPHONE OR INTERNET
24 HOURS A DAY - 7 DAYS A WEEK
INTERNET
--------
https://www.proxyvotenow.com/uns
- Go to the website address listed above.
- Have your proxy card ready.
- Follow the simple instructions that appear on
your computer screen.
OR
TELEPHONE
---------
1-866-358-4695
- Use any touch-tone telephone.
- Have your proxy card ready.
- Follow the simple recorded instructions.
OR
MAIL
----
- Mark, sign and date your proxy card.
- Detach your proxy card.
- Return your proxy card in the postage-paid envelope provided.
You can vote your shares by telephone, the Internet, mail or in person at
the Annual Shareholders' Meeting. Your telephone or Internet vote authorizes
the named proxies to vote your shares in the same manner as if you marked,
signed and returned your proxy card. If you have submitted your proxy by the
Internet or telephone there is no need to mail your proxy card.
For Shareholders who have elected to receive UniSource Energy's Proxy Statement
and Annual Report electronically you can now view the 2005 Annual Meeting
materials on the Internet by pointing your browser to
http://www.UnisourceEnergy.com.
1-866-358-4695
CALL TOLL-FREE TO VOTE
-------------------------------
THE INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M.
E.S.T. ON THURSDAY, MAY 5, 2005.
DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY THE INTERNET OR TELEPHONE.
-------------------------------------------------------------------------------
(FORM OF PROXY CARD - FRONT)
Please Sign, Date and Return [X]
the Proxy Promptly Using the Votes MUST be indicated (x)
Enclosed Envelope. in Black or Blue Ink.
The Board of Directors Recommends a vote "FOR" the following proposal:
1. Election of Directors
FOR all nominees WITHHOLD AUTHORITY to vote *EXCEPTIONS [ ]
listed below for all nominees listed
[ ] below [ ]
Nominees: 01-James S. Pignatelli, 02-Lawrence J. Aldrich, 03-Larry W. Bickle,
04-Elizabeth T.Bilby, 05-Harold W. Burlingame, 06-John L. Carter,
07-Robert A. Elliott, 08-Kenneth Handy, 09-Warren Y. Jobe
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided
below).
*Exceptions
------------------------------------------------------------------
If you agree to access our
Annual Report and Proxy
Statement electronically in
the future, please mark this
box. [ ]
To change your address,
please mark this box. [ ]
To include any comments,
please mark this box. [ ]
-----------------------------------
SCAN LINE
-----------------------------------
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. When shares are held by joint
tenants in common or as community
property, both should sign. When
signing as attorney, executor,
administrator, trustee, guardian or
custodian, please give full title as
such. If a corporation, please sign in
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person. Receipt is hereby
acknowledged of Notice of Annual
Meeting, Proxy Statement and the 2004
Annual Report.
Date Shareholder sign here
----------------------------------------
Date Co-Owner sign here
----------------------------------------
-------------------------------------------------------------------------------
B-1
[A street map showing the location Marriott University Park Hotel
of the Annual Shareholders' Meeting 880 East Second Street
is set forth in this area.] Tucson, AZ 85719
520.792.4100 Hotel Direct
800.228.9290 Reservations
TRANSPORTATION
From Tucson International Airport
Shuttle Service
Arizona Stagecoach
Call 520-889-1000
Automobile - Interstate 10 to
Speedway exit
DEAR SHAREHOLDERS:
If you previously elected to view the UniSource Energy Corporation Proxy
Statements and Annual Reports over the Internet instead of receiving copies in
the mail, you can now access the Proxy Statement for the 2005 Annual
Shareholders' Meeting and the 2004 Annual Report on the Internet through the
following address: http://www.UniSourceEnergy.com. You can vote your shares by
telephone, the Internet, Mail or in Person at the Annual Shareholders' Meeting.
See the Proxy Statement and the enclosed proxy card for further information
about voting procedures.
If you would like a paper copy of the Proxy Statement and Annual Report,
UniSource Energy will provide a copy to you upon request. To obtain a copy of
these documents, please call 866-275-4867.
-------------------------------------------------------------------------------
(FORM OF PROXY CARD - BACK)
UNISOURCE ENERGY
This Proxy is Solicited on Behalf of the Board of Directors of the Company
for the Annual Shareholders' Meeting to be held Friday, May 6, 2005.
P R O X Y
The undersigned hereby appoints James S. Pignatelli and Kevin P. Larson,
and each of them, with the power of substitution, to represent and to vote on
behalf of the undersigned all shares of Common Stock which the undersigned is
entitled to vote at the Annual Shareholders' Meeting scheduled to be held at
the Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona,
on Friday, May 6, 2005, and at any adjournments or postponements thereof,
with all powers the undersigned would possess if personally present and in
their discretion, upon such other business as may properly come before the
meeting. This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED "FOR" Proposal 1.
B-2